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Having a successful start-up: How your team should be composed

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Entrepreneurship is an important source of innovation and technological change. And as standard macro theory suggests, these are main drivers of growth and prosperity. For a long time entrepreneurs were stereotyped as “lone wolves”, but this is not necessarily true. Start-ups are often led by teams. This raises the question what kind of teams are most successful in setting up a firm.

In a new IZA Discussion Paper Laura Rosendahl Huber, Randolph Sloof and Mirjam Van Praag compare teams of generalists with teams of specialists. They conduct a field experiment with Dutch children playing an entrepreneurship game. The 11- and 12-year-olds are randomly assigned into four groups, based on test results. Math-specialist teams are comprised of pupils with very good math grades but relatively poor verbal skills. Verbal-specialist teams are composed in the same manner. Third, in mixed-specialist teams, representatives from both skill groups work together. And last, there are JATs – the “Jacks-of-All-Trades” – who have balanced skills, which means they are equally good (or equally bad) at both math and verbal classes.

During a five-day program, the students set up their own small firm to produce friendship bracelets. They start by establishing a business plan and presenting it to a venture capitalist. After designing and producing the friendship bracelets, the children calculate production costs and sales prices, then advertise their product to younger students. After trying to sell as many bracelets as possible, they produce their balance sheet. The group with the best profit/loss relation wins.

The researchers discover that JAT and math-specialist teams performed best. In particular, they did much better than the mixed-specialist teams. This could be taken as evidence that it is not possible to replace the balanced skills of an individual with balanced skills within the group. On average, therefore, teams of generalists tend to perform better than teams of specialists.

A survey among the students after the experiment revealed that in the mixed-specialist groups there was much more internal conflict than among the JATs. So in more diverse groups the costs of coordination and communication seem to be higher than in more homogeneous groups. But this does not necessarily mean that less diversity is performance-enhancing: verbal specialists (perhaps not surprisingly) also reported that there was a lot of arguing going on in their teams.

How foreign language classes shape migration within the EU

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Given the large differences in youth unemployment rates across Europe, one would expect young people to migrate from countries with high unemployment rates to those with better job prospects. But in reality, migration across European countries is still much lower than across the United States. One of the key reasons is the language barrier within the EU, which could be overcome with better language education, as a new IZA discussion paper shows.

In the paper, Ainhoa Aparicio Fenoll and Zoë Kuehn use historical data on starting ages for foreign language studies in EU countries and find that having learned the language of a country during compulsory education increases the likelihood to migrate to that country almost fivefold. This suggests that improving foreign language teaching at school can facilitate labor movement within EU countries. The authors thus conclude that educational reforms should play a substantial role in EU cohesion policy.

Sick on the job or sick of the job? Insurance benefits and absenteeism

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Absenteeism is a cause of substantial loss of working time worldwide. In some OECD countries nearly 10 percent of annual working days are lost because of sickness absence. The costs are considerable for employers, co-workers, and health and benefit systems. Among cash benefits, sickness insurance – which compensates workers for their earnings losses – is one of the most important social protection schemes in Europe.

While sickness insurance is important to mitigate income shocks of truly ill individuals, very generous systems create a moral hazard problem as people might prefer to stay at home and live off the insurance benefits. In that respect, the key policy parameter is the replacement rate – the ratio of sickness insurance benefits to past earnings. Policymakers face the difficult task to set the optimal replacement rate so that work incentives and the “right to be sick” are balanced.

In a new IZA Discussion Paper, Petri Böckerman, Ohto Kanninen and Ilpo Suoniemi analyze how people in Finland respond to different replacement rates. The authors use a special feature of the Finnish sickness insurance system, which is that the replacement rate is not the same for everyone but depends on past earnings.

The authors find strong behavioral responses to changes in the replacement rate: a one percent increase in the replacement rate raises sickness absence by 1.4 percent. Policymakers should be aware of this sizeable effect when designing sickness insurance schemes that might induce some to stay home longer than medically necessary.

Should Greece leave the European Union?

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In light of the recent recession and demands by some observers that Greece and other Southern European countries should leave the Eurozone, politicians often point to the benefits of European integration for all countries. Without the EU, they say, growth and prosperity in Europe would not be as high as they are. But to date there are few reliable studies that quantify these benefits.

In a new IZA Discussion Paper, Nauro F. Campos, Fabrizio Coricelli and Luigi Moretti provide evidence that becoming a member of the European Union pays off for most countries. Using a method called “synthetic counterfactuals”, the researchers investigate how a country would have fared without joining the EU. On average, these countries’ per capita incomes would have been 12 percent lower in the first ten years. But there are substantial differences across countries.

The estimated benefits are especially large for Denmark, the United Kingdom, Portugal and Ireland. Over time, the benefits for the UK diminished while they accelerated for Ireland. This suggests that Great Britain gained most from the single market while Ireland benefited especially from the common currency.

Only Greece experienced lower GDP and productivity growth rates after joining the EU. But according to the authors, this is no indication that Greece should leave the Eurozone. The growth rates were relatively low in the first years after becoming a member, but since the introduction of the economic and monetary union, Greece grew faster than the EU on average between 1996 and 2008. If Greece now succeeds at implementing important structural reforms, the benefits are likely to persist.

What happens when employers are free to discriminate? Evidence from the English Fantasy Football Premier League

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Research on employers’ hiring discrimination is limited by the unlawfulness of such activity. Observational studies report lower wages for minority, but may be affected by the difficulty of comparing “like for like”. An alternative strand of research focuses on the intention to hire. Typically, fake CVs, differing only by the implied race of the applicant, are sent to recruiting employers. Differences in callback rates imply discrimination in the hiring process. However, these studies can only observe the variation in callback rates, not in hiring decisions.

In a new IZA Discussion Paper, Alex Bryson and Arnaud Chevalier look at actual hiring decisions in a virtual labor market, the Fantasy Premier League (FPL), an online game based on the English professional football league. The aim of the game is to hire 15 footballers playing in the English Premier League and to accumulate points according to their performance on the pitch. As such, we can think of the FPL participants as employers. 2.8 million individuals play FPL each week, behaving just like employers in hiring and transferring football players in the hope of winning the league. These employers are “free” to discriminate because there is no legal impediment to them doing so. Despite this, the authors find FPL employers show no racial discriminatory behavior in choosing their team. This is true, for the three seasons that are investigated (2009/10 to 2011/12). [Read more…] about What happens when employers are free to discriminate? Evidence from the English Fantasy Football Premier League

Want better grades? Get a good night’s sleep!

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Students who sleep seven hours per night during the exam period score an average of 1.7 points higher (on a scale of 20) on their exams than peers who get only six hours of sleep. In a new IZA DP, researchers at Ghent University and KU Leuven surveyed 621 first-year students about the quality of their sleep during the exam period and correlated it with their exam performance.

In total, approximately 30 percent of students received a score of 5 on the Pittsburgh Sleep Quality Index (PSQI) – good for the label of ‘bad sleeper’. More female students (35 percent) than male students (26 percent) fell in the ‘bad sleeper’ category. The researchers corrected their results to account for differences in socio-economic background and general health traits.

All else equal, students who generally got a good night’s sleep performed better on exams. Students who fell one standard deviation (and thus significantly) above the average PSQI score achieved almost a full point less for each exam they sat.

Additionally, the number of hours slept – and not the quality of sleep during that time – played a significant role in exam performance. Students who increased their night’s sleep from six to seven hours were rewarded with an average increase of 1.7 points (on a scale of 20) for each exam. “Of course, optimal sleep time varies for each individual,” says IZA fellow Stijn Baert, who co-authored the study.

By way of explaining the results, the researchers point to previous studies, which found that sleep is essential for one’s all-around state of mind and motivation. “A good night’s sleep optimizes cognitive performance in a very direct way since new knowledge is integrated into our existing knowledge base while we sleep,” says Baert. The process of memory consolidation occurs mostly during the REM sleep phase, which is concentrated in the second half of the sleep cycle. Getting at least seven hours of sleep is essential to this, according to the paper.

Are government workers really more public-spirited than those in the private sector?

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By Mirco Tonin (University of Southampton and IZA)
and Michael Vlassopoulos (University of Southampton)

A fifth of UK workers are employed in the public sector. Though public sector work is obvious crucial – schools, hospitals, police and so on – measuring performance can be a challenge as output is not generally sold to customers and thus metrics like revenues or profits are not available.

Public organisations also often pursue many different objectives, with various stakeholders having divergent interests. For these reasons, the public sector is prone to phenomena like waste, regulatory capture or outright corruption. So if the public sector is to function well it is important that it is staffed by workers who are intrinsically motivated to deliver high quality services.

There is a concern that this type of public service motivation may be crowded out if services are privatised or outsourced to the private sector. Financial incentives, such as performance-related pay, may also attract into public service workers who are more sensitive to monetary incentives, but less motivated by serving the public. These financial incentives may also redirect effort towards the measures of performance that carry the best rewards, but potentially away from what really matters for a good public service.

To assess these issues it is important to understand first of all whether the public sector is indeed effective in attracting motivated workers.

[Read more…] about Are government workers really more public-spirited than those in the private sector?

Encouraging single mothers to work – evidence from the Netherlands

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Welfare benefits are a double-edged sword. On the one hand, the poor need them to survive, on the other hand they provide an incentive to withdraw from the labor market and live off the government transfers – especially if these transfers are generous. The situation is especially difficult for single mothers who have to combine work and childcare and therefore often have even lower incentives to work. The Netherlands have a quite generous social security system, with low work incentives for single mothers: Before 2009, when a mother started working in a part-time job, her labor income reduced welfare benefits one-for-one.

In a new IZA Discussion Paper, Marike Knoef and Jan C. van Ours investigate ways to encourage single mothers to work again. They use a natural experiment that took place in the Netherlands between 2009 and 2010, when 14 Dutch municipalities set up a program to improve the work incentives for single mothers with at least one child younger than 12. First, an earnings disregard allowed mothers to earn up to 120 euros per month in labor income without a reduction in welfare benefits. Second, the municipalities started a job creation initiative that sought to provide single mothers with work for at least 12 hours per week.

The authors find positive labor supply effects for both parts of the program. The earnings disregard increased participation and earnings, especially for immigrant single mothers. The job creation initiative reduced welfare benefits and increased earnings for immigrants with the youngest child between the age of 5 and 11 and for native single mothers with the youngest child aged 4 or younger.

Overall, the treatment effect is higher for immigrants than for natives. According to the authors, this may be explained by the fact that native single mothers were already more strictly monitored and engaged in labor market policies. Furthermore, natives are more likely to receive financial support from their parents or families, which makes them less responsive to monetary incentives.

A culture of crime: growing up with the mafia next door

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Organized crime generates about two percent of global GDP. While this is already a considerable share, the mafia and other groups of criminals might have an even higher economic impact by shaping the norms and attitudes of their surrounding societies, yielding potentially costly second-round effects.

In a new IZA Discussion Paper Stephan Meier, Lamar Pierce and Antonino Vaccaro compare the behavior of students from three schools in Palermo, Sicily. While one school is located in a neighborhood where police and government have strongly fought and successfully reduced the influence of the mafia, two other two schools are in an area where the mafia is still very active. The authors show that students from neighborhoods with high mafia involvement behaved significantly less cooperative, less trustworthy and more selfish in the laboratory experiments compared to students from two other areas. Interestingly, this pattern changed when the students knew with whom they were playing. In these situations, students from mafia neighborhoods cooperate much more since they know that a classmates benefits. In contrast, they are more selfish if they don’t know the beneficiary. The authors conclude that growing up in a culture of crime reduces general trust and biases trust toward in-group members.

Mr. Rossi, Mr. Hu and politics: How immigration shapes natives’ political preferences

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International migration is a global phenomenon, widely studied in the literature. An important but less investigated issue concerns the role of immigration for the political preferences of the natives, who often have strong views and prejudices on the issue. These feelings are likely to be among the determinants of residents’ political choices at the polls. At the European institutional level the issue is even more important, since immigration policy is at the core of the debate on the future of the European Union. Interestingly, parties that are against the Euro area and that are proposing an exit strategy for their countries are often associated with protectionist views on immigration. The Front National in France, the Dutch Freedom Party and the Italian Lega Nord (Northern League) offer some examples of these combined political positions.

A recent IZA discussion paper by Guido Barone, Guido De Blasio, Alessio D’Ignazio and Paolo Naticchioni analyzes the role of immigration in shaping electoral outcomes in the case of Italy, where immigration increased rapidly in the last two decades. As reported by an Italian newspaper, of the first ten family names entered at the register office of Milan in 2012, three were originally from China; the second most recorded being the Chinese Hu. The most frequently recorded name remains Rossi, a typical Italian surname. Twenty-five years ago no foreign last name (among the first ten) was recorded at the same office.

[Read more…] about Mr. Rossi, Mr. Hu and politics: How immigration shapes natives’ political preferences